All right, let's get started. Good afternoon. My name is Puneet Jain from Payment Processors and IT Services team at JP Morgan. Glad to have here with us, TaskUs's Co-Founder and Chief Executive Officer, Bryce Maddock. Welcome, Bryce.
Thanks, Puneet.
The format of this presentation is going to be fireside chat. I'll start with a few questions, and I'll open the floor from questions from audience. For those folks who are listening to webcasts, feel free to use the online portal to send questions our way. Bryce, you recently reported your Q1 results. Maybe if you can briefly review your Q1 results outlook, as well as how TaskUs is differentiated in the marketplace?
Yeah, sure. For Q1, we reported $235.3 million in top-line revenue, adjusted EBITDA margins of 23.5%, and that's against the guidance of $233 million at the top end, and 21% adjusted EBITDA margins. We updated our guidance for the year to $925 million-$950 million in top-line revenue, and increased our adjusted EBITDA guidance to 23.5% from 23%. We confirmed our free cash flow guidance of more than $100 million in free cash flow, excluding the payout to Heloo that's associated with the earn-out in that acquisition.
As far as TaskUs goes, we provide customer experience, trust and safety, and AI services to rapidly growing technology businesses and enterprises that are looking to transform the way that they deliver services. We've got nearly 50,000 employees across the globe in 13 different countries. We're coming up on 15 years in business.
No, that's great. One of the two headwinds that you faced last year and continuing to face on year-on-year basis are high exposure to fintech and U.S.-based delivery as the clients are pushing work more offshore and to lower cost locations. Can you talk about how large each one of those buckets are right now, and what do you expect for second half of this year?
Yeah. The fintech business, excluding crypto and equity trading clients, actually continues to grow quite healthily. In Q1 of last year, just crypto and equity trading clients represented 15% of our total revenue, and that dropped to 4% of our total revenues in Q1 of this year. In the U.S, we made 33% of our total revenues from U.S. delivery in Q1 of 2022, and that was down to 20% in Q1 of 2023. You know, obviously, that creates a substantial headwind to overcome. Fortunately, we have been able to drive significant growth in our offshore and nearshore markets. Our revenue from our offshore and nearshore markets grew 19% year-over-year in Q1 of this year.
How low, the U.S. mix can go to from the current 20%? Like, what's the absolute bottom, for this?
Yeah. This is a question we've gotten asked a lot. The reality is the majority of what remains in the U.S. needs to be done in the U.S. for regulatory reasons, strong client preferences, or because the end customer is the U.S. government. We recognize that we've seen more downside in those U.S. revenues than we had forecast initially. In our initial guidance, we assumed that we would make about 15% of our revenue as a company from the U.S. in the back half of this year. In our updated guidance, we took that number down to 10%. We think that we're approaching a floor on that portion of our business.
As you are one of the vendors with huge capabilities, delivery capabilities across the world, especially in Philippines and India, in Eastern Europe, are you seeing like more clients, new clients coming to you, looking for lower cost solutions, looking for more efficiency in their business processes?
Absolutely. I mean, particularly amongst our existing clients, we've seen very robust growth offshore. We're continuing to grow that business, as I said, 19% year-over-year in Q1. If I look across our top 10 clients, and we exclude our largest client who went through the onshore to offshore shift and our largest crypto and equity trading client, I mean, we've got two clients who have tripled revenue from 2021 to 2023, and two that have doubled revenue over the course of that period of time. That's much faster growth than their internal revenue growth, which I think is indicative that we're taking share from the competition. In some cases, we're actually taking share from internal teams. Across our client base, we're seeing clients look for more efficient solutions.
At this stage, our offshore and nearshore solutions are the most efficient way of delivering work.
Let's take a step back, like TaskUs was set up like as a pure-play providers to high tech clients.
Mm-hmm.
That has been your moat, your differentiator for so long. Last year, you started talking about that you're going to offer services to enterprise customers in digital areas, but going after like a different type of customer. Talk to us like how large that segment is right now and, what is your strategy to penetrate or to win more of those clients?
Yeah. I mean, when we look at the history of the business, we started by focusing on rapidly growing technology businesses and helping them to scale their outsourced service footprint. We've increasingly begun to focus on big tech customers. These are the largest technology clients in the world, and we made good progress there last year, landing three of the world's largest technology clients where we continue to grow. In the traditional enterprise space, last year we talked about wins that we had in the travel space, including one of the U.S.'s largest airlines, and a large retailer. Those relationships continue to expand as well. We don't break out revenues based on sort of tech, high growth tech and traditional enterprise.
It is safe to say that the traditional enterprise continues to make up a larger portion of our, of our overall business.
What is your sales strategy? Like, do you have to do something differently in sales as well as in delivery when you service those clients?
You know, the sales cycles tends to be slightly longer. Usually though, we're talking about different opportunities than their core commoditized customer care work. Usually, these clients are pulling us into their network because they're looking for a vendor that can reimagine their customer experience in a more digitally native way. You know, those contracts, when we're being pulled into the vendor network, can contract faster.
Can you also talk about like the large technology companies that are in your backlog?
Yeah.
Like, how are they ramping up? How large they can become as part of your overall self, revenue?
Yeah. On the earnings call, I gave an example of a one of the big technology companies that we had scaled for the holiday season. Typically these companies would cut volumes pretty substantially in Q1. We held our volume. Then at the end of Q1, we actually got double the volume. So we're continuing to grow pretty aggressively into the next holiday season with that client. Across our big technology clients, we also see opportunities to sell into their subsidiary companies. Those conversations are progressing nicely.
We often get, like, lots of investor questions on generative AI and what it means for customer care.
Sure.
thanks for doing that call with us.
Yeah
two weeks ago.
It was. Yeah. It was last Friday.
It feels-
Friday before.
It feels like million years ago.
Mm-hmm
actually. No, thanks for doing that call. Let's look at it like as two ways. Like, generative AI, its applications and the benefits that you can get. When we think about like the applications of generative AI to customer care, there is like a growing view that a lot of customer care work can get automated, that the productivity savings, we have heard estimates as high as 30%, 40%, 50%, 70% even using generative AI. Talk to us, like what's real?
Yeah
what's hype, and which areas are more susceptible to get automated or to see more productivity gain using this technology?
I think if we look at our business, a first take, where I think there's gonna be clear benefit. In our trust and safety services, it's very obvious to me that this technology is gonna be used to create lots of content. You only have to look at the most recent deepfakes to understand the implications that this has to democratic elections, you know, the creation of offensive content, impersonations of people. I think there will be an explosion in demand for trust and safety services, and I think we're well-positioned to benefit from that. Inside our AI services, we see a huge amount of interest from the generative AI companies themselves. We're supporting the development of two of the three leading large language models.
We're also building adversarial testing teams inside our trust and safety space, and prompt engineering teams to help these businesses build the next generation of these models. I wanna put that portion of the business aside 'cause I actually think that there's a real tailwind to those sides of the business. 2/3 of our revenue comes from customer service, and I think here the conversation has to be a little bit more nuanced. The simple tier one support work is going to be increasingly automated. Because of our clients being high-growth technology customers, the vast majority of them have put huge investments in automating as much as they can of their upfront customer workflows. And that automation usually looks like some sort of a chatbot, which is based on a decision tree.
We think those decision trees will be ripped out, and they'll be replaced with large language models that are more dynamic and potentially could solve more problems. At this stage, we have not seen, what I would consider like a real killer application that's facing the customer, but I'm sure that those will come. Fortunately for TaskUs, the vast majority of the customer support work that we do is either highly technical in nature, requiring lots of research, across multiple different domains, or it is like multiple points of contact. You can imagine in a food delivery use case, you might have a hungry customer text in, but then we need to pick up the phone and call the delivery person or call the restaurant. While that seems simple, it's actually very, very difficult to automate that type of work.
We've built a platform called TaskGPT. This platform is being used by our teammates today to research answers to our clients' questions. For our highly technical programs, we're able to load the entire knowledge base and repository of training materials and historical customer answers. It makes our teammates faster and more effective at answering customer questions. At this stage, we're building agent-facing tools that will make our teammates more productive and augment their work. I don't think we're anywhere close to fully automating these workflows.
A hungry customer trying to order food. That was me last night. Let's talk about like TaskGPT.
Yeah.
Talk to us like about this platform or tool, like, how does it help your agents and your team members become more productive?
Yeah.
How much effort was put in creating this, and is that something that your peers cannot replicate?
Yeah. There are two versions of TaskGPT. The first is effectively an interactive knowledge base. In this case, we're taking an existing knowledge base and training materials, we are embedding that content into either GPT-3.5 or GPT-4, we're able to allow our teammates to write prompts against that content and get answers back. The other version is one which sits on top of a CRM system, we can integrate directly into Salesforce, Zendesk, or any major CRM. We look at what questions are coming from our customers, we are able to suggest the best response to our teammates. This is all done with a human in the loop so that the teammate can review and edit the answer. It, you know, requires extensive training based on existing either answers or knowledge base information.
To your question, the reality is that because of OpenAI, all of the startups that were raising hundreds of millions of dollars to build chatbot technology in their own large language models are back to square one. Every single one of them is deploying ChatGPT or OpenAI's technology in the exact same way that we are. This technology has really leveled the playing field for a service provider like TaskUs. Where we think the differentiation now sits is in who controls the data. We're sitting inside of our customers' CRM systems, and with their permission, we can use their historical data to train these models to more efficiently answer customer questions.
Got it. Got it. If you think about your AI data annotation services, should we expect like in addition to the data tagging that you do, more like data modeling, more prompt engineering?
Yeah.
Some of those capabilities in there?
Yeah. I think what's happened here, which is interesting, is, you know, at the start of training these models, it looked a little bit like being an elementary school teacher or a preschool teacher. It was very simple, data tagging. Now we've moved up the value chain, and we're recruiting people who are experts in particular subject areas. These experts are either free writing responses to questions, or they're rating the responses that the model creates. The builders of all of the large language models are recruiting experts in every domain, from chemistry to popular movies. We're helping to recruit and deploy those experts for the development of these models.
Do you have to change your hiring strategy? TaskUs has always been very innovative-
Yeah.
in reaching out to potential employees. As you change the type of people you hire, like you talked about, like the industry experts, people with subject matter expertise, maybe more technical workforce, do you need to change hiring strategy?
You know, I think, we are an employer of choice in almost every market in which we operate, and so we use our brand's positioning, to attract employees. Clearly, we're moving up the value chain and attracting a higher caliber of talent. There's some dynamic work there. I feel pretty confident we're well-positioned to build a very talented prompt engineering workforce.
As you drive this adoption of some of these tools, generative AI tools within your project teams, within your workforce, do you have to change how you define success when winning a new customer or adding a new contract or when servicing existing customers?
I think the challenge here is to whom does the upside accrue, right? If we're deploying one of these tools to a customer who we're billing hourly, we're gonna charge a licensing fee for the technology. Ultimately, the tool could make us use fewer hours and make less revenue. Increasingly, we're pushing our clients into outcome-based agreements. On the Q1 call, I talked about our largest outcome-based agreement where from January to March we improved our margins by 4%. That's a model, I think, for the future of the business. Historically, it's been challenging to convince our customers to contract for outcomes because they were so focused on growth. Hourly billing models are by far the easiest to put in place.
I do see an increase in demand for outcome-based agreements in this environment where cost focus has increased substantially.
How ready your clients are to adopt these new models? In the past, we have heard, like, the clients resist-.
Yes.
moving to outcome-based or output-based because they want certainty of how much they're paying to a vendor. Do you think that clients appreciate the productivity savings through these tools and are more ready now to adopt these models?
I think given the cost pressure in the environment, we are seeing an increase in the appetite for these models. Again, you know, in terms of fixed unit economics, there actually is no better model for a client because you're paying per outcome.
I do not want it to be a generative AI call, but last question. We often hear, like, there are constraints around governance, control, privacy related to this technology.
Mm-hmm.
Talk to us, like you share your perspective, like how real some of those constraints are and how those constraints can become an opportunity for someone like TaskUs.
Well, I think the reason, I'm looking for examples here, so if anyone has one, please feel free to send it to me. The reason I don't think we've seen widespread consumer-facing deployment of this technology is exactly this, which is it's difficult to control. The historical approach to chatbots has been fixed decision trees. Fixed decision trees are very easy to control. Deploying a large language model, you do not know what it's going to say. For that reason, we've already deployed this technology in many of our customer use cases on the agent side, because you have a human in the loop who can review the content before it gets back to the customer. I think companies will be a little more cautious in deploying consumer-facing applications.
They're absolutely gonna do it, but I think it will be a little more slow-going than the tech inside the contact center itself.
At this point, if there are any questions from audience, feel free to ask. Just wait for the mic. Do you need to wait or go ahead?
Can you hear my voice?
Yeah. I can hear you.
Yeah.
Bryce, thank you for attending the conference. Much appreciated.
Mm.
Just one question. It sounds like incumbent companies like yourself proprietary data your customer uses, you're gonna have an ability to retain a client more easily than a competitor trying to enter that client.
Yeah.
The question is, as you wanna grow as a company, TaskUs, and you wanna enter a new client, how do you get in when it seems as if the incumbents in the world of AI will have an easier time retaining their incumbency because they have the proprietary data to help themselves?
Yeah. I think it's a very important question. Certainly I think in this market, we have... I don't think this is the reason, but we have seen new clients be a little bit more hesitant to introduce new vendors. I think at this stage, that's mostly because the total share is not growing as fast as it did over the last couple years. We do have an advantage in existing clients because we've got this historical repository of data. That data, though, belongs to our clients, not to TaskUs. That is an opportunity for us in new cases. If we can use this data to develop models more effectively than the competition, then I still think there's an opportunity for us to sell into new customers.
All we need to do is access their historical information, and then use that to build and to train the model. Now I'm, you know, I'm not naive. I'm sure that every single one of our competitors will be attempting to do the exact same thing. I do think we're well-positioned, given our relationships in the industry, and the speed with which we've been able to deploy TaskGPT as a kind of V1 model.
Last question. Clearly many companies, including yourselves, are trying to utilize the ChatGPT and AI functionality as well as possible, and no one knows what the result will be. From your perspective as an onlooker, how does one evaluate which companies are being most successful in using AI functionality to improve their performance as a corporation for themselves and for clients?
Yeah. That's a really good question. I mean, inside our clients, the ones that are moving the fastest are doing it in a way that's highly experimental. As a result of it being so highly experimental, I think there's a lot of hesitancy in revealing it to their end consumer, but there's not as much hesitancy in revealing it to their agents or their workforce at TaskUs. You know, in addition to using TaskGPT, we've had a number of our clients also deploy their own GPT-based solutions. Kind of put them out there and just see the way in which teammates interact with them. I think there's a lot of learnings from that. To measure this from the outside is gonna be difficult.
I think, you know, hearing some of the anecdotes from companies is one way. I ultimately would look at kind of what is the cost to serve. In our case, you know, we're helping our clients to reduce the cost to serve, both by taking workflows that were done in the U.S. and expensive markets in Europe and moving them to lower cost geographies, and by integrating this technology to do more with fewer man-hours.
I know you did a lot of content review.
Mm-hmm.
What prevents that from being automated by AI or something else?
We support some of the world's largest social media networks, who have invested billions of dollars in automating content moderation. Content moderation today is over 99% automated. The work that remains, you know, less than 1%, is a, you know, multi 10,000 person workflow supported by multiple vendors. At this point, we don't think that that less than 1% is at risk. In fact, we think we're really well-positioned to retain that business 'cause most of what we're doing today is being done in the Philippines and India. We've grown with our largest client, as an example, by over 2,000 teammates over the course of 2022. Those are the lowest cost, most effective geographies to do that work from.
As long as humans are still gonna be in the loop, I think we stand to benefit.
Any other questions? All right, I'll keep going. Last few years, like, has been, like, very tight, labor market, like the supply has been super challenged, across all regions. Talk to us, like what trends you're seeing in terms of hiring people, retaining people, as well as talk about what you're seeing for wage inflation and ultimately on pricing.
Yeah. I mean, it's definitely been a challenging market. I feel like the worst of it was Q2 of last year. We saw attrition peak in kind of the post-pandemic timeframe in Q2 of last year. Since then, we've seen attrition numbers come down. We've been very fortunate to be able to continue to deliver on our clients' hiring demands. Our hiring SLA is over 99%. Even though we have seen a downtick in terms of overall headcount in Q1, we saw continued growth in our offshore and nearshore markets where we've been adding thousands of people. We continue to be able to do that effectively. I think the market is less competitive than it was last year, but it's still quite hot.
What are you seeing for pricing trends?
Do you mean customer pricing or for pay?
Customer pricing.
Customer pricing is interesting. There's definitely not an appetite to pay significantly more at this stage. We're using pricing conversations as an opportunity to sell our outcome-based agreements. As I said, in Q1, we locked a client into an updated outcome-based agreement. We got them savings, and then we were able to expand our margins by 4% over the course of the quarter. I think we'll see more of that type of outcome, in an environment where pricing is a little tighter than it was previously.
On margins, like you expect your margins to improve over the next few years to get to potentially 25 percent-?
Yes.
on EBITDA margin basis, how do you get there from your current levels? Is it like expectation that you'll do more outcome-based contracts that will drive margin expansion, or is it more organic or more from operations as you ramp on some of the new regions and that will drive expansion?
Yeah. I mean, at this point, I think we've got amongst the highest margins in the industry. I think we can continue to expand our margins by first better leveraging our offshore delivery capabilities. We make higher gross margins offshore than we do onshore, so that's been supportive of our margin picture. Second is doing exactly what you say, moving our clients to outcome-based agreements where we control our own fate and can use technology and process to improve margins. Finally, getting better fixed cost leverage over our G&A. We have continued to do that, as I talked about on the call, we had a multiyear efficiency effort that we kicked off last year that'll save us well over $20 million in calendar year 2023, and significantly more next year.
just being very disciplined in this environment about corporate spending, and making sure every dollar is being invested in deploying next generation technology and getting back to growth.
Talk to us about your use of cash strategy. Like, you have not been very acquisitive. You've done an acquisition last year, heloo, which seemed like a great asset. Compared to some of your peers, you are more conservative in terms of use of cash. Talk to us, given, like, the new tools, new technology such as generative AI and need to expand across more locations, should we expect TaskUs to become more acquisitive?
Well, first, I mean, when we're talking about a capital allocation strategy, or first and foremost, we wanna focus on what can we invest in internally. We are making a significant investment in building a technology team to lead our generative AI efforts. We announced a technology and innovation center in Chennai, India, where we plan to hire a significant number of engineers to continue to build these tools for us. We're also continuing to expand in our sales efforts, again, to return the business to growth. The next use of capital would be M&A, but the problem for us is that our multiple has sunk so low that nobody will sell to us for our own multiple. That leaves us with the assessment that we're the best buy in the business.
We've put our money where our mouth is and doubled the size of our stock buyback to $200 million. We've already deployed $45 million of that stock buyback, and people can expect us to get more aggressive at these levels.
Any other questions from audience?
Can you hear me?
Yeah, I can hear you. [inaudible]
just about, you know, you mentioned the hiring of content engineers-
Yeah. -
that are across a number of Yeah. in this environment where many corporations are looking to cut costs more than grow revenue, approximately
What portion would you say of your, the gross new revenue you're generating is coming from, services where you're providing efficiency and cost-cutting for clients versus providing them services to help them grow their business?
Yeah, that's a great question. We do offer sales services. You know, it's a small portion of our overall revenue. We haven't broken it out. You know, you can think of it as a kind of a mid-single-digit percentage would be focused on selling. The remainder there is all about helping our clients to control cost and operate as efficiently as possible. You know, 90% plus of our business is about operational efficiency.
Okay. Just lastly, you know, let's say we're in a recessionary environment...
Yeah.
on a global basis
Mm-hmm.
-for corporations. In the past, you've challenged your internal staff to try and have net revenue growth of 15% among existing clients.
Yeah.
To what degree is that possible in this sort of business environment versus others where budgets are freer?
You know, I think it's actually possible for our business, given the counter-cyclical nature of some of what we do. And what I mean there is when I talk about the fact that amongst our top 10 clients, we've got two clients who over the last two years have tripled their spending with us, and another two that have doubled their spending with us. Those are examples of clients who are outsourcing more. They're taking the internal processes that were being done by expensive in-house teams and moving them to our efficient teams in the Philippines and India. I think that even in a recessionary environment, we can expect to see growth amongst clients.
The corollary there, the two, or the counterpoint, I guess, the two headwinds are, one, anything that we're doing in high-cost geographies, like Europe and the U.S., are at risk of being offshored. Any instance in which a client's total volumes begin to shrink. Fortunately, despite the fact that our clients are not as high growth as they once were, the vast majority of our clients do continue to grow, even in this challenging economic environment. You know, we expect to continue to be a beneficiary of that growth.
Let me quickly ask about your largest customer, the social media company. With lot of offshore mix at that client behind you, and with all the changes happening at the company, metaverse, de-emphasizing metaverse, maybe AI as a new area for growth, how should we think about that client over the next few years?
Look, I mean, we continue to have a very strong relationship there. Despite the fact that we expect revenue to decline from last year, we believe that we are actually taking share as our declines are less than the overall vendor network. I think we're very well-positioned in the Philippines and India to deliver cost-effective solutions for them at scale. And we are being asked to partner with them on some of their most strategic initiatives. I feel very good about where we're positioned, you know, despite the fact that overall, there's been a downturn in their spending.
Can you increase your volume with that client this year? I understand total revenue will be down, but can volume increase?
Yeah. I mean, last year we pointed out that volume increased substantially. We added about 2,000 net teammates for them, over the course of the year. I think it's possible that that will continue, if not remain flat.
That's great. On that note, thank you so much.
Yeah. Thank you so much, Pini. Appreciate it.
Appreciate you spending time with us.